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Smart Credit Card Useage

Highlights and Warnings: An Open Discussion


Typically, you are now walking around wondering why the Home Equity Line of Credit is not in place for everyone if it is so effective.  You will hear a lot of people give their opinion.

But you have a non-opinionated spreadsheet in your hands using the numbers that you provided.  The results are obvious - or are they?  

What is really happening here? What are the "pitfalls"? Are those pitfalls really areas that you can get in trouble with?


So let's have it.  The Highlights & Pitfalls: An Open Discussion and be frank about these Principles involved.

This discussion is going to take the form of Q&A. Further discussion can be found in on the Facebook pages.

Fair warning - if the comments turn nasty or it is obvious the contributor has not worked through the process, the comments will be deleted.

Required Input

First Person Monthly Nett?
Second Person Monthly Nett?
Other Income Monthly Nett?
Monthly Spend?
Mortgage Pay Out?
Interest rate?
Mortgage Balance

Pay Out Date
Loan Term (Years & Months)
Total Interest

Q. How can I compare my spreadsheet with a traditional loan from a financial institution?

A.  I encourage everyone to do this.  Most banks put up a mortgage calculator on their website.  Vary the length of the mortgage i.e. 20, 25, 30 years and see what affect this has on the total interest paid and to your RLOC calculations.

Q. But if I enter in a mortgage period equal to what my spreadsheet says for when my mortgage will be paid out.  The interest is identical.  So what is the advantage?

A.  Yes, if you could find the money to make traditional mortgage payments at a rate necessary to clear the debt in the same amount of time as the HELOC does, the interest is the same.  The trick is "You cannot".  You could only do this if you did not have any expenses, that is you did not eat, did not have any entertainment, in other words, did not live.

What is happening is that your lender is taking your money out of the system and into their pocket in exchange for the service of helping you buy a home.  No problem, a restaurant takes your money for feeding you, etc.  However, we are using "time", an element that only money possesses that effectively lets us use the same dollar twice - the first time: to pay the mortgage for a while and second (when the money is properly withdrawn from the system): to pay the living expenses "some time" after they were incurred. 

Q. "Experts" say I can get in trouble by running up the credit cards that are part of this HELOC system.  Is this true ?

A.  If you "max out" credit cards and do not pay them, you can get into trouble under any system.  You have to follow the terms that you set down for yourself when you got these cards in the first place.

BUT under a traditional system, you have to find money for your mortgage as well as your credit cards.  So if you cannot find extra money if you are in trouble, your lender may demand payment and, in the worse case, sell up your house to meet the debt. 

There is a certain irony in that, isn't there?


BUT under a HELOC scenario, you can withdraw without penalty up to (usually) 80% of the value of the property which should be more than enough to pay out the credit card.  After all, the lender may have gone close to 80% of the property valuation when they gave you the mortgage and thus they have already agreed to that legally. (We will actually see this in later discussions.)

HOWEVER getting into trouble with credit cards can happen under any system.  It is the human, not the system, that causes the problem.  Now you see though, that by segregating the credit card obligation and the mortgage obligation, the difficulty is actually compounding.  Some cynics may suggest that this is a deliberate ploy by some lenders.

Q. My current mortgage allows me to make extra payments.  How can I do that with RLOC ?

A.  Simply put - YOU CANNOT.  There are no set mortgage payments under this system.  All monies are going into the outstanding balance of the "credit card" called your "mortgage".  Which brings up the second point, how can have money to make extra payments even if you could?  The RLOC system works best when you put all monies into it.  if you are keeping monies out of the system (in a separate account, a "slush fund", "mad money" - call it what you want) this is a leakage that extends the length of your mortgage and, by now you realise,

time costs money.  

No system is leakproof - sometimes you just have to pay cash - but these leaks are getting to be fewer and fewer.  When you begin to see just how much you are losing by having "a bit of cash" in your pocket, you will become more resourceful, more aware and get in the habit of using your credit card more often.

Q. I feel like I have restraints and this system will prevent me from doing things?

A.  This is an emotional statement I hear often.  

And if by this point, you still feel this way then this system is not for you.

In reality you have better usage of your limited resources (after all money does not grow on trees) which in turn will feel like you have more money.  You will minimise your expenditure on "dead" interest (the secured interest of the mortgage is lower than interest from any other source) since you are using none of high interest with the traditional way a credit card is used.  (More on this later.)

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